China March services PMIs hit multi-month highs

Workers are seen on a construction site for a new factory at an industrial area in Beijing April 1, 2013.
REUTERS/Kim Kyung-Hoon

BEIJING Growth in China's services sectors rose to multi-month highs in March as a construction boom and firmer demand lifted business and confidence, auguring well for a modest recovery in the world's second largest economy.

The official purchasing managers' index (PMI) for the non-manufacturing sector climbed to 55.6 in March from February's 54.5, aided by a buoyant construction sector. A PMI reading above 50 indicates accelerating activity.

A separate services PMI published by HSBC showed growth rebounding to a six-month high of 54.3 in March as improving economic conditions lifted demand, pushing business confidence to a 10-month high of 65.0.

Analysts welcomed the data as an encouraging sign that China's moderate economic revival is extending beyond its factories into an increasingly-important services industry.

"China is on track to beat the government's growth target for 2013," said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong, referring to Beijing's goal of expanding gross domestic product (GDP) by 7.5 percent this year.

"Services account for a larger share of GDP than manufacturing so improvement of sentiment here bodes well for the entire economy," said Kowalczyk, whose 8.5 percent GDP forecast for China in 2013 is among the most bullish in the market.

China's services industry has weathered the global slowdown much better than its factory sector, in part because it does not rely on exports for growth unlike manufacturers, who have been battered by crumbling foreign demand.

Twin PMI surveys for China's manufacturers published on Monday showed factory production quickened last month on firmer domestic demand, though the speed of the pick-up was not as brisk as some expected.

Indeed, the pair of services PMIs also showed that though firms expanded last month, business is not surging. Overall new orders in the services sector nudged up just 0.2 index points to 52.0 in March from February, the official PMI showed.

The services sector, which overtook factories as the biggest employer in China in 2011, accounted for 46 percent of the Chinese economy last year, as big as the manufacturing industry.

WELL-DISTRIBUTED RECOVERY

The National Bureau of Statistics, which publishes the official PMI, said the rise in new orders was evident across multiple sectors.

Firms in the information and communications sector and in the industries of retail, hotel and real estate all enjoyed more new orders in March compared to February.

But growth was strongest in the construction sector, where companies have thrived on big government infrastructure spending. The sector sub-index jumped 4.5 points from February to 62.5 in March.

Beijing had brought forward construction of about $150 billion worth of infrastructure last year as part of an effort to nudge the economy out of its worst slowdown in 13 years when annual growth sank to 7.8 percent.

That the rebound in activity extended across businesses in March indicates that China's economic recovery is well entrenched, said Qu Hongbin, a HSBC economist.

"Notably, the on-going recovery has translated into a continuous improvement of labor market conditions, which are supportive of consumer spending growth in coming quarters," Qu said.

The HSBC PMI showed staffing levels in services firms rose last month, albeit modestly, in the 49th consecutive month of gains as companies hired more workers to meet growing demand.

Yet busier activity did not fan inflation. Input prices rose more slowly in March compared with February. Moderate production inflation capped final prices, which barely rose last month from February.

Muted inflation should comfort investors worried that rising prices may lead China to tighten monetary policy too early and imperil its modest economic revival.

The central bank had raised money supply and cut interest rates twice last year by a total of 50 basis points to engineer a recovery in the economy.

Most analysts expect China's economy to enjoy a steady but gentle recovery this year, with infrastructure investment and household consumption helping compensate for softening demand for Chinese exports.

GRAND RAPIDS, Mich./WASHINGTON When President-elect Donald Trump returns to this factory town on Friday for a victory celebration, he will find a region that is already experiencing the manufacturing renaissance he promised on the campaign trail.